Where there is opportunity, there are people to take advantage of it. Unfortunately scammers take advantage of opportunity to the detriment of others. Opportunity to a scammer is when a person is vulnerable, overly hopeful of finding help, and so eager to get out of their current situation that they fail to fully research any offers before signing onto them. Right now, this describes Americans stuck in the foreclosure process.
In 2009 there were approximately 900,000 foreclosures, followed by 1.2 million foreclosures in 2010 . There was a decline of foreclosures in 2011 to 804,423 . On top of the foreclosures and desperate people, there was the introduction of a government-sponsored initiative for mortgage modifications  — truly making this a perfect storm for scammers.
Not surprisingly, the amount of foreclosure scams and the type of scams have increased dramatically. I’d like to discuss some of the more prevalent ones to watch out for.
Types of Foreclosure Scams
- Rent to Buy: The scammer will promise to purchase your home and rent it back to you until your financial situation improves. You have to give the con artist your title in exchange for this deal. The promise is that once you are back on your feet, you have the option to repurchase the home. Unfortunately, what happens is the scammer does not pay your mortgage on your behalf (signing over the title does not relieve you of the mortgage liabilities), so eventually you are foreclosed on and evicted after having paid the “new owner” rent over a period of time. With the average amount of time between defaulting on a mortgage loan and foreclosure procedures being 492 days , you can see how lucrative this scam would be. The FTC outlines another variation to this scheme where the “new owner” raises your rent over a period of months to the point where you have to move anyway . Then, they are free to sell the house and walk away with your equity.
- Finding a Buyer for You: Scammers may promise to find a buyer for your home and give you a portion of the profits, but only if you move out and sign over the title to them. You transfer the deed, they rent the house out and collect rent from a new owner, and meanwhile your lender proceeds with foreclosure. At the end you are still on the hook for the mortgage (transferring the deed does not transfer the financial liability).
- Phantom Counseling: For an upfront fee, these scammers promise to negotiate a deal with your lender that will save your house and reduce your payments. The problem is that they never deliver on the deal. On top of this, some phony counselors have you make your mortgage payments to them while they are “negotiating” a deal with the lender, leaving you in an even more precarious state once you figure out what is going on.
- Bait-and-Switch Loan Documents: Scammers will give you a stack of papers to sign so that they can “modify your loan” or to get another loan to make your mortgage current. Hidden in the stack of papers is one that actually signs your deed over to them.
Cost of Foreclosure Scams
There are many costs to foreclosure scams beyond just the financial cost to homeowners and the economy. Other costs include emotional and relationship tolls, as well as downgraded credit scores .
- Emotional Toll: The emotional toll is probably the biggest one. Getting ones hopes up after almost losing their home, only to be deceived and left in a worse state than before can have a huge impact on someone. Many homeowners are in relationships and/or are raising families, and the stress level can negatively impact everyone involved.
- Decreased Credit Score: Even though one could argue that someone who is close to foreclosure would probably have their credit impacted anyway, many of these scams leave the homeowners on the hook for unpaid mortgages and therefore add to a bad credit score. See 7 ways to fix your credit after a foreclosure  to see what a foreclosure will do to a credit score.
- Cost to Homeowners and the Economy: The Joint Economic Committee of Congress estimates that the average foreclosure costs $77,935, while preventing a foreclosure costs $3,300 . This average includes the costs to the homeowner, neighbors, lenders, etc. Foreclosure scams that directly deal with homeowners (such as the ones in this article) take even more money away from people’s bank accounts and put that money into the pockets of scammers.
Each of these foreclosure scams involves a person clearly taking advantage of someone. Yet along the process there are many times where asking the right questions or doing due diligence would perhaps have saved a homeowner from continuing on with the offer.
Stay tuned for the next article in this series where I discuss how to avoid foreclosure scams.